11 Jun New Income Based Repayment Plans, Same Old Story

The arrival of yet another government-initiated plan to manage out of control student loan debt has attracted more fanfare than it merits. The new plan is hailed as a “life preserver” for student borrowers drowning in high student loan debt by the finance and education industries. The article hyping student loan repayment plans found on the Forbes Money Builder site is an example of this propaganda. In fact, the new Income Based Repayment Plans (IBRPs) embody most of the undesirable features of Income Contingent Repayment Plans, which have been part of the student loan landscape since 1993 and have a proven track record of inadequacy.

Both types of student loan repayment plans are described on the FinAid website. They operate by setting a payment amount calculated from the debtor’s income and capitalizing unpaid interest. This becomes a Sword of Damocles hanging over the head of the student loan debtor for the entire 25-year repayment period. Both plans trigger potentially large cancellation of debt tax obligations if the borrower does complete the plan, and both require significant payments from individuals whose incomes are considerably below what the IRS and the Bankruptcy Code consider to be sufficient to maintain an adequate standard of living. Both plans apply only to Federally-guaranteed loans and make no allowance for unusual expenses, including repayment on private student loans.

The most significant difference between ICRPs and IBRPs is that ICRPs are Federal direct loans whereas IBRPs are made by commercial lenders under government guarantee. In many cases the lender will simply be refinancing its own loans, using the generous influx of Federal funds authorized as part of recent bailout bills. Instead of paying off the loan at its current face value, collecting what it can until the loan defaults or matures, and writing off the remainder, the Federal Government is committing to paying up to 25 years of accrued interest as well. That this is a bad deal for the public is obvious.

In most cases, at least in the short term, an IBRP will result in a somewhat lower payment amount than an ICRP, but the difference is hardly dramatic. However, without going into detailed calculations, students, recent graduates struggling with loans, and employees of college financial aid offices are likely to focus on these small present savings and opt for the program being pushed by the student loan industry, to the long term detriment of individuals, the American educational system, and overall national fiscal stability.

I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.